Starbucks may add debt, return cash after Mondelez settlement

Once Starbucks Corp.’s legal dispute with Mondelez International Inc. over a coffee joint venture is settled, the Seattle-based company could move to lever up its balance sheet.

Keith Siegner, a restaurant analyst with Credit Suisse, believes Starbucks is waiting for this period of uncertainty to pass before taking advantage of low interest rates by issuing debt. He thinks the company could move towards a McDonald’s-like 1.4x to 1.5x lease-adjusted net debt to EBITAR.

“We believe Starbucks is simply waiting until after the settlement, as a more attractive interest rate may be available when the dollar amount of the settlement is no longer a source of uncertainty,” Mr. Siegner told clients.

“When Starbucks does start adding leverage, we believe it will look to McDonald’s as a model,” he added, suggesting it could do so gradually over about a year.

Since Starbucks has more than US$2.5-billion in cash and investments on its balance sheet and a current lease-adjusted net debt to EBITDAR of just 0.7x, the analyst estimates it could fund nearly US$5-billion of additional cash returns, even after paying Mondelez.

The snack food giant that was spun off from Kraft Foods Group Inc. has claimed US$2.9-billion in damages.

Mr. Siegner expects a settlement in the neighbourhood of US$1.2-billion – lower than what the buy-side appears to be anticipating – will come by the end of the current quarter.

He noted that Starbucks has continued to return cash to shareholders since the legal proceeds began in 2010, while also managing to add approximately US$1-billion of cash to its balance sheet.

With additional leverage, the analyst thinks Starbucks could return an additional US$4.7-billion in cash to shareholders from fiscal 2013 to 2015 – much more than consensus estimates.

He suggested this could lead to a 35% higher dividend of US$1.59 by fiscal 2015 as Starbucks raises its payout ratio from 35% to its long-term goal of 45%. Consensus is currently US$1.11.

The remaining cash could be used for share buybacks, which Mr. Siegner estimates may add 4% and 6% to 2014 and 2015 earnings per share estimates, respectively. However, this is not yet reflected in his forecasts given the uncertainty around the timing of a settlement.

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